Monday, July 23, 2012

Nomura is bullish on Panama government bonds

Nomura Jun12 - Panamá Report

Nomura warns about the disappearance of prudence in fiscal policy of the current administration, as cash from the 2010 eurobond sales is used in public works:

"During the Perez Balladares administration (1994-1999), Panama embarked on an ambitious structural reform agenda, including privatizing unprofitable and inefficient state-owned enterprises. In an important decision, the country decided to deposit the proceeds from these asset sales into the Trust Fund for Development (FFD), and only spend the investment proceeds from it.
This policy avoided the fiscal excesses that were common in the region at the time, where governments spent one-off revenues from privatizations to expand current public expenditure. When proceeds from these transactions ended, public finances suffered.
As such, we are concerned that the authorities will continue their expansive fiscal policy well into 2013. We think this could be the main reason for increasing the fiscal deficit ceiling this year as part of the law that created the FAP. In addition, if President Martinelli indeed runs for re-election in 2014, we think that Panama's political environment will deteriorate fairly quickly.
We recommend zero exposure to Panamanian sovereign bonds. While this positioning might be relatively premature, we prefer to recommend it now in expectation of a sharp rise in fiscal spending for electoral reasons next year.
For those that are currently involved in this credit, we think it may be opportune to begin executing an exit strategy.
We recommend replacing Panama with exposure to other high-grade credits in Latin America, such as Peru, Colombia and Mexico. Because of Panama's expensive valuations, we think investors are likely to benefit more from owning other LatAm high graders with lower downside risks. "

For individual investors seeking a Panama porfolio, purchase of preferred shares by Panama banks seem a sound alternative to government bonds.


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